Opening a new independent pharmacy can be a rewarding endeavor that offers the opportunity to be your own boss while providing services to the community and patients that helps them take control of their health. However, opening a brand new independent pharmacy from scratch is a challenging process with many details to consider. This article gives you a step by step guide to the main details to be addressed when starting a new pharmacy along with helpful hints on how to ensure you open a successful independent pharmacy both legally and efficiently.
SELECT A LOCATION
One of the most important aspects of a successful retail pharmacy business is location. There are many items to consider, such as competition, accessibility to the location, ample parking, demographic information, economic state of the trade area, etc. A Pharmacy Feasibility Study or site audit is the critical first step for all start-up pharmacies. It is imperative to answer the question, “What is the potential for opening a successful pharmacy at this location?”
The ultimate goal of the study is to gather information on as many of these factors as possible and weigh them to determine if a new pharmacy will be successful at the proposed location. These factors can then be analyzed more closely to create financial projections. Spending some time and perhaps a little bit of money to ensure that your new pharmacy venture will give the desired Return on Investment and can prevent a $500,000 mistake that could profoundly affect your financial future.
Often times, wholesalers will give the number of scripts written each year by physicians in the area. Keep in mind, that this is only a small part of the picture as most customers use pharmacies that are located near where they shop and live. Many times physicians, especially specialists, draw patients from outside the community and chances are those patients will not become your customers. The point is, there are plenty of important factors beyond just the scripts being written in an area so do not rely on just that information.
The most important factor when evaluating a potential location is to determine the geographical trade area and then the population demographics of that area. Accurate demographics along with the average cost per script and scripts filled per age range in that trade area makes it possible to accurately formulate the amount of total prescription revenue available in that trade area. Once that figure is calculated, the next task is determining how much of that revenue the new pharmacy can expect to capture.
A key component of captured revenue is the number and type of competitors. Your new pharmacy is going to have to convince customers to change their shopping habits from their current pharmacy. How likely is that to happen? Usually, it is much harder to compete with another independent than it is with a major chain like a CVS or Rite Aid. Supermarket pharmacies have the advantage of the one-stop-shopping concept, which is appealing to many busy consumers and can also be a tough competitor.
Finally, what does the location itself offer? Is it in a shopping plaza with a grocery store near a bedroom community or is it a stand-alone building that offers a drive through service? What can you offer to differentiate yourself from the existing competition? Remember to look at factors in terms of where the new pharmacy your opening will be in relation to the rooftops. Are there any natural barriers between the pharmacy and the population (i.e. rivers, terrain, interstates, anything causing lack of direct access, etc.)?
Once there is a complete picture of the trade area with the estimate of patients captured during the first two years, the process of creating realistic financial projections can begin. Project the amount of revenue, estimated gross profits, expenses and a net operating profit or loss. With exceptions, most new independent pharmacies will operate at a loss for about 12-24 months before reaching a breakeven point.
Before obtaining a start-up pharmacy loan, the development of a solid pharmacy business plan is required. A good pharmacy business plan should include a mission statement, an executive summary, services the pharmacy will offer, location analysis, projections of the profitability and how long will it take to begin earning a profit. Include a full breakdown of costs and how much capital will be needed for construction, inventory, equipment, technology, employees, marketing, and operating expenses after opening to reach a breakeven.
Include data supporting the opening of the pharmacy as attachments to the business plan to keep it concise. The business plan may mention population and housing increases with a demographics report and data showing an increase in housing as attachments. If a new employer providing jobs to the community is coming to the area, attach a news report detailing the plan. Less is better when formulating the core of the business plan since lenders are only interested in answering one question, “How is the money getting paid back.”
Present the business plan to lending institutions to begin applying for a loan. A well-drawn up plan will demonstrate to the bank that the pharmacy will be a sound investment. Obviously, the bank will ask many more questions about the proposed business, so be prepared to fully explain the business and personal finances and pharmacy management experience. There are a few pharmacy specific banks that provide loans for start-up pharmacies. These banks have experience in the pharmacy sector and understand the loan process for a start-up pharmacy better than most community banks. A typical start-up pharmacy loan will be between $500,000-$700,000 and require a down payment of 20% cash. As stated earlier, most start-up pharmacies will not get to their breakeven point until 12-24 months following the opening so having sufficient capital to cover all operating costs and expenses until then is essential to the success of the new pharmacy.
FORMING A BUSINESS ENTITY
Any new business needs to obtain a FEIN through the IRS to operate and hire employees. In addition, whether you do it yourself or hire a firm, create a business entity such as an LLC with S Corp tax designation to protect personal assets from potential liabilities. Most attorneys can assist with this process and guide you in the right direction.
Choosing a wholesaler is important and pharmacies need to do their homework and select the right partner for their business. Carefully consider what each wholesaler has to offer and how that fits into the pharmacy’s business plan and objectives.
In almost all cases, it may be more beneficial to join a pharmacy Buying Group. The buying group takes the total book of business for all its member pharmacies combined to negotiate pricing and services with wholesalers and other vendors. When pharmacies combine their purchase volume, they get the wholesalers to fight for their business, rather than the other way around, which gives them the power to demand a better deal. They also provide other benefits such as a generic drug program, return policy and services to help run the pharmacy more efficiently. Services provided vary per group so select the one that best fits programs the pharmacy plans on offering.
Technology is vital to independent pharmacies and not only includes the operating software, but also IVR, POS, printers, scanners and internet/phone providers. Select a system that best suites the operation and the services to be provided. Most systems do a good job filling and billing. What is needed is a system that has the backend reporting to run the pharmacy better such as workflow management, financial and business reporting, inventory control and perpetual ordering, integration with automation, robust patient information features and do not forget about support services. Poor support services is the number one complaint with virtually every software provider. Reach out to colleagues for their referral on systems to consider and then reach out and schedule demos. If you do not know much about pharmacy software services, find someone that does to help you. The software selected will provide the backbone for the operation of the pharmacy and can be critical to success. Plus, do you really want to be aggravated every day by a glitch ridden system and lack of support?
PROTOCOLS, TIMELINES AND REQUIREMENTS
As mentioned earlier, opening a new pharmacy is a challenging process, especially as it pertains to all the state and federal laws and requirements for licensing and PBM contracting. If you are not prepared, do not allow adequate time, and do not understand the licensing and PBM enrollment procedures as they apply to your state…….IT WILL COST YOU MONEY!
- Delays in Opening…. Cannot open because you underestimated the time involved with licensing the pharmacy.
- Lost Revenues…You are open for business, but again underestimated the difficulty and time to enroll in the PBM contracts and thus are unable to bill some or all 3rd party networks. Not a good first impression telling customers “I cannot fill your prescription.”
- Increased Business Costs…. Employee costs, rent, drug inventory, computer fees, etc. and no income coming in because you estimated it would take three months to open when six months was more realistic.
- Frustration…The opening date must be after enrollment in PBM contracts and you can’t apply to do so until federal and state licensing is complete.
Pharmacy Permit Application
Prior to meeting with the landlord, architect, or construction manager, investigate/obtain your State Board of Pharmacy Rules and Regulations as they pertain to the application process, facility requirements and inspection guidelines.
What is the required pharmacy equipment and reference library? Is a copy of the lease agreement or a wholesaler affidavit part of the application? What are the security, square footage and counseling area requirements? Does the computer need to be installed with the ability to print a label at the inspection? Do I need to submit a schematic drawing of the layout and design with the application? How long to approve an application, schedule an inspection and receive the pharmacy permit number. These are just some of the questions that need to be answered for efficient planning of the opening.
State Controlled Substance Registration (if applicable)
Not all states require obtaining a state-controlled substance registration. Some states automatically provide this number along with your pharmacy permit (with an additional fee), while others may require an additional application and submission to another agency. Understand what is involved and how to obtain this registration.
Drug Enforcement Administration (DEA)
The DEA Registration certificate requires obtaining a pharmacy permit and a state-controlled substance registration (if applicable) first. Reach out to the local DEA field office to inquire on their requirements for enrollment. In some areas, an inspection may be required and if so, will add time onto the opening timelines.
National Provider Identifier (NPI)
An identification number for health care providers that is used by all health plans. Most pharmacists have their own NPI number, however, for a start-up pharmacy you will need to obtain a facility NPI. This takes about 15 business days for enrollment.
National Council for Prescription Drug Programs (NCPDP)
A unique 7-digit, national identifier that assists pharmacies in their interactions with pharmacy payers and claim processors. Cannot request an enrollment application with a 3rd party payer until the NCPDP is obtained. Enrollment timeline about 15 days
Third Party Payers
Upon receipt of the federal and state licenses and the NCPDP number you can now begin to enroll in the PBM/3rd party contracts. Part of the enrollment process is to find Pharmacy Services Administration Organization (PSAO). Most buying groups or major wholesalers offer this service. This is a must to obtain the majority of the 3rd party enrollments in addition to negotiating reimbursements from payers as part of a large pharmacy network. Reach out to a PSAO while evaluating wholesalers to begin the application process and enrollment can be finalized once the licenses are obtained. Please note that the following PBM’s are not included in any PSAO enrollment programs: Caremark, Cigna, Humana, Express Scripts, Optum Rx, State Medicaid and Medicare Part B. It will be your responsibility to reach out to each PBM, request an application or enroll online and follow up for approval. Allow approximately four months to complete enrollment for the Non-PSAO plans
Certificate of Liability Insurance
PBM’s will require a copy of this certificate in the amount of $1 million per incident/$3 million aggregate to be attached to the PBM application
A $50,000 surety bond is required to be enrolled in Medicare. Some private insurance prescription benefit programs will also require this bond.
The following enrollments can be found under the National Supplier Clearinghouse (NSC) website:
- Medicare Part B for drugs and biologics (855S)
- Medicare Part B for immunizations (855b)
- Medicare Part B DMEPOS will require accreditation
Medicaid is state specific and, in some states, may take up to 6-9 months to enroll in some of the slower states.
As you prepare and conduct due diligence of the protocols, timelines, sequences and requirements of licensing and 3rd party enrollment, and determine the processes for each, you should be able to properly prepared to establish a timeline and subsequent planned opening date.
Compliance and Credentialing will play a big part in the opening and
ongoing operations of any independent Pharmacy. Ensure you have
policies, procedures, forms, and employee trainings for the various
regulations and contractual requirements. Some of these may include:
- General State Board Compliance
- DEA Controlled Drug Compliance
- State Controlled Drug Reporting
- Medicare Part D Fraud, Waste, And Abuse
- Medicare Part D Compliance Program
- USP 795 (Non-Sterile Compounding)
- USP 797 (Sterile Compounding)
- USP 800 (Handling of Hazardous Drugs)
- Third-Party Pharmacy Credentialing
- OSHA Hazard Communication Standard
- OSHA Exposure Control Plan for Bloodborne Pathogens
- State Point of Care Testing for CLIA Waived Testing
- Drug Supply Chain Security Act
- Non-Discrimination (Section 1557 of the ACA)
- HR Requirements
Starting a pharmacy is a big investment in both time and capital. Commit to doing it right from the start. Be prepared with timelines and requirements and strongly consider using the help of an experienced professional. A pharmacy consultant with years of experience in opening
independent pharmacies is a worthwhile investment in your future success. But be careful, there are many so called pharmacy consultants that do not fully understand the process. In particular, avoid
wholesaler assistance programs and any non-pharmacist consultants as they have proven to be the least knowledgeable and helpful.
Why Choose PRS to help you open your new Pharmacy…
Opening/starting a new pharmacy is a big undertaking. Even small mistakes can have a huge impact and delay or halt your opening. You need the right team to help you accomplish a smooth and successful pharmacy opening.
PRS is the ONLY pharmacy ownership consultant endorsed by NCPA, the Federation of Pharmacy Networks and over twenty Buying Groups representing more than 15,000 independent pharmacies. Why? Our vast experience in a variety of unique situations make us the BRAND name in pharmacy consulting, compliance, and brokerage. To date, PRS has sold, transferred, or opened over 500 independent pharmacies and has worked in all 50 states. We are fully insured, licensed, and accredited. We invite you to compare us to our competition and see the difference
experience can make for yourself.
If you decide to have us help you start a new pharmacy, we will assign one of PRS’s licensed Pharmacists with more than 20 years of experience opening retail and in-store pharmacies to be your Project Manager. The Pharmacist Project Manager, along with our skilled support staff, will work with you every step of the way to take the stress out of, what can be, a very stressful process.
Do you already have a location picked out for your new pharmacy?
Be sure to check out our “Pharmacy Location Feasibility Study” which will provide you with a detailed site audit and help confirm that you’ve picked a good location before you spend hundreds of
thousands of dollars.
If you don’t have a location picked yet give us a call at 800-338-3688! We can help!